Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

Legal Entity governance: Best Practice ideas

Maintaining an up-to-date legal entity organization process / document is an important requirement for accurate and timely tax compliance and planning.  Best Practice ideas for consideration include the following:

Governance sign-off process for all changes of a legal entity, including:

  • Stated capital
  • Share premium (Additional paid-in capital)
  • Authorized capital
  • Officers / Directors
  • Tax elections re: tax characterization
  • Change in name or form of entity
  • Trade names / DBA
  • Restructurings / Mergers / Liquidations
  • Articles of Incorporation or Association

Documentation backup supporting all changes during the life of a legal entity, including formation and dissolution

Assigned Legal Entity champion in the organization

Governance process re: authorized users (view/print/edit)

List of authorized users

Guidelines re: providing legal entity data to third parties, including audit requests

Providing updates with distribution on a real-time (electronic) basis

Master Legal Entity Chart, archiving prior versions as permanent files

Permanent file retention of relevant supporting documentation

Listing of nominee shareholders

Legal and tax characterization, if different

Developing legal entity approval and sign-off in a business recommendation, rather than a separate subsequent process

Most organizations have a process to govern legal entity changes and provide contemporaneous information, although all processes merit a creative review to gain additional efficiencies and Best Practices.

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Tax Risk Management

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EU Parent-Sub Directive: GAAR/Mismatch proposals

The proposals for the EU Parent-Subsidiary Directive have been published, with a summary and KPMG review in this post.

Proposed amendments on 25 Nov., 2013

•    Domestic law implementation

•    Financial mismatches (PPL, hybrids, etc.)

•    GAAR:

Artificial arrangements: to gain improper tax advantages, and defeats object, spirit & purpose of tax provisions

•     Compliance with Directive by 31 Dec. 2014

Determination of artificiality (one or more):

•     Legal characterization, vs. legal substance, of individual steps

•     Does not reflect economic reality

•     Arrangement is not ordinarily used in reasonable business conduct

•     Arrangement has offsetting or cancelling elements

•     Transactions are circular in nature

•     Arrangement results in a significant tax benefit which is not reflected in the business risks undertaken by the taxpayer

Click to access eu-nov25-2013.pdf

This proposal follows GAAR implementations by several countries in advance of the OECD BEPS Action Plan.  This subjective anti-avoidance action should be followed, as other countries will also be examining the relevant wording and guidance therein.

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Tax Risk Management

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Tax transparency & Country reporting: PwC briefing

The timely and comprehensive PwC update is insightful into the various aspects of the transparency and country-by-country reporting initiatives.  Selected topics include:

  • Extractive Industries Transparency Initiative (EITI)
  • Dodd-Frank Wall Street Reform and Consumer Protection Act
  • EU Directives on Accounting and Transparency
  • EU Capital Requirements Directive (CRD IV)
  • Appendices re: country-by-country reporting information requirements, EITI reporting framework, EU Accounting and Transparency Directive requirements, and EU Capital Requirements Directive IV.

Click to access pwc_tax_transparency_and-country_by_country_reporting.pdf

This guide is a valuable overview of the multiple initiatives re: transparency and country-by-country reporting.  Tax executives should use this guide in developing a conceptual tax framework for providing summary/detailed data, developing a relevant methodology for capturing such information and providing supplemental information that may be beneficial.

 

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Tax Risk Management

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South Africa’s Davis Tax Committee: Update / BEPS alignment & input

Following his 2013 Budget announcement, the Minister of Finance publicised the members of a tax review committee on 17 July 2013. The committee, now known as the Davis Tax Committee (DTC), will examine the role of South Africa’s tax system to promote growth, job creation, sustainable development and fiscal self-reliance. It will take the long term objectives of the National Development Plan into account in its work.  The following links provide reference to the DTC homepage and biographies of its members.

http://www.taxcom.org.za/aboutus.html

Click to access Tax%20Review%20Committee%20-%20Brief%20Biographies.pdf

Using its Terms of Reference as the point of departure, the DTC has adopted a work programme that has prioritised the establishment of specialist sub-committees on small businesses, the appropriateness of the tax base and tax mix in South Africa, and base erosion and profit shifting (BEPS).

The DTC has also adopted an approach that is participatory and consultative. This will provide for wide engagement with all stakeholders. Special dialogue sessions are arranged on an ongoing basis to take into account a diversity of interests and opinions. The DTC accordingly calls upon all interested parties to make use of the opportunity to contribute to the mentioned priorities for now.

Top priority of the DTC at the moment is to address ways in which the tax system can be improved to facilitate entrepreneurship and the growth of small businesses. Various tax packages already exist to encourage small businesses. The DTC needs to review these packages to find an optimal tax package that assists small businesses in contributing towards economic growth and reducing the high unemployment rate. Urgent contributions in this regard will be most welcome by 20 November 2013.

Contributions with regard to the tax burden and tax mix are invited by 30 November 2013. The BEPS Sub-Committee is working on a longer timeframe that is aligned with the OECD BEPS Action Plan. Contributions with regard to BEPS are welcome by 31 January 2014.

All contributions can be made via e-mail to taxcom@sars.gov.za . More details on the work of the DTC and its Terms of Reference can be found on its website, http://www.taxcom.org.za .

For multinationals with operations in S. Africa, it is beneficial to maintain reference to the operations of the DTC, their alignment with the OECD BEPS Action Plan and provide input, as applicable.  

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Tax Risk Management

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UK transparency initiatives announced

The Prime Minister announced that ownership details of UK companies will be made publicly accessible.

This announcement was preceded by a Discussion Paper in July 2013 outlining various proposals of the initiative, including the statement in paragraph 11: “The names of legal owners appear on an individual company’s share register, which is publicly available.  But if we want to know who really owns and controls a company, we must identify its beneficial owners too.  The beneficial owners are the individuals that ultimately own or control the company – either because they hold an interest in more than 25% of the company’s shares or voting rights; or because they control the management of the company in some other way.”

Links to the announcement, Discussion Paper, and executive summary of the Discussion Paper are attached for reference.

https://www.gov.uk/government/news/public-register-to-boost-company-transparency

Click to access bis-13-959es-transparency-and-trust-enhancing-the-transparency-of-uk-company-ownership-and-increaing-trust-in-uk-business-executive-summary.pdf

Click to access bis-13-959-transparency-and-trust-enhancing-the-transparency-of-uk-company-ownership-and-increaing-trust-in-uk-business.pdf

This initiative is likely to be followed closely by other countries, and details requiring UK disclosure should be reviewed early to adopt Best Practices and address questions arising in the UK and around the world from this public disclosure announcement.  

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Tax Risk Management

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Withholding taxes: Cash efficiencies

Withholding tax rates are increasing in many developing countries, creating additional timing and/or permanent cash inefficiencies.  To the extent withholding tax payments, receipts and documentation are viewed from a Best Practice process perspective, immediate cash savings may be realized.  The following points may be considered in this process:

  • How are payments attracting withholding taxes identified?
  • Identify internal/external responsibility for tracking changes in withholding tax rates and communication to the business payor.
  • Are higher payments being made due to contemporaneous documentation (i.e., certificates of residence) not received timely?
  • What integration is in place for Tax and/or Treasury to manage the withholding tax process?
  • For shared service centers, how are changes in withholding rates communicated for timely implementation?
  • Has an internal and/or external review of withholding taxes been performed in the last year?
  • How are withholding taxes considered for new intercompany loans?
  • Who reviews withholding tax considerations for legal entities in new jurisdictions?
  • For taxes that are not ultimately creditable, is there a process to identify and quantify such payments?
  • Is there a review process for proper characterization of “withholding” taxes that may or may not be creditable?
  • Is there specific responsibility within the business to ensure withholding taxes are properly characterized and paid timely?
  • Should a withholding tax flow chart be used for internal governance and global consistency in methodology?
  • Is there a governance process for collection of receipts when withholding taxes are paid?
  • Identify a process for physical/electronic receipt retention to ensure timely and accurate documentation is maintained for audits.
  • Are different payment flows in place for similar services where withholding taxes apply?
  • Is there a variance analysis performed on a recurring basis to identify significant changes?
  • Are internal governance principles established for withholding taxes?
  • Is the business aware of the importance for efficient mechanisms re: withholding taxes?

Withholding, and similar, taxes are being legislated by many countries, especially in developing markets.  Accordingly, Best Practice processes should be in place to maximize cash efficiencies.

 

 

 

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Tax avoidance strategies: Int’l human rights law violations? – IBA report

The facilitation of tax avoidance strategies could constitute a violation of international human rights law, according to a new report by the International Bar Association.

http://www.ibanet.org/Article/Detail.aspx?ArticleUid=4A0CF930-A0D1-4784-8D09-F588DCDDFEA4

The International Bar Association’s Human Rights Institute (IBAHRI) Task Force on Illicit Financial Flows, Poverty and Human Rights was convened to reflect upon these pressing questions from the perspective of international human rights law and policy. This innovative report:
  • provides a detailed overview of tax abuses and secrecy jurisdictions
  • investigates the links between tax abuses, poverty and human rights
  • draws on case studies from Brazil, Jersey and the SADC region
  • evaluates responsibilities and remedies to counter tax abuses affecting human rights
  • delivers unique recommendations for states, business enterprises and the legal profession

For the purposes of this report, tax abuses include the tax practices that are contrary to the letter or spirit of domestic and international tax laws and policies. They include tax evasion, tax fraud and other illegal practices − including the tax losses resulting from other illicit financial flows such as bribery, corruption and money laundering. The term ‘tax abuse’ also includes tax practices that may be legal, strictly speaking, but are currently under scrutiny because they avoid a ‘fair share’ of the tax burden and have negative impacts on the tax revenues and economies of developing countries.

This report covers developments in international tax cooperation on issues such as automatic exchange of information, and base erosion and profit-shifting. It also assesses trends in international development policy which are increasingly focused on strengthening good tax governance in developing countries – thereby reducing dependency on foreign aid and improving development outcomes. It demonstrates the evolution of international human rights law and policy, whilst highlighting tax abuses as a pressing human rights concern.

The Task Force’s goals and objectives are:

1. To publish an innovative report containing findings and a set of recommendations on the interaction between illicit financial flows, poverty and human rights.

2. To widely disseminate the report with the view of pushing the issue of tax evasion and human rights onto global policy agendas, and sustaining discussion thereafter.

3. To incite multi-level policy changes in the area of tax evasion and economic, social and cultural rights adjudication to help end global poverty.

The report cites the following topics for relevance in its comprehensive discussion:

  • OECD BEPS Action Plan
  • OECD Anti-Bribery Convention
  • OECD “Tax Inspectors Without Borders” initiative (refer to 9 June posting)
  • G8 and G20 countries
  • US FATCA rules
  • US Dodd Frank legislation
  • UK House of Commons
  • UN Guiding Principles on Business and Human Rights
  • EU Accounting and Transparency Directives
  • Extractive Industries Transparency Initiative (EITI) (39 countries have signed up)

This report provides interesting insights into the complex relationship of international taxes and non-tax principles and objectives, for which all international tax executives should be aware.  Appendices of the report provide suggested recommendations for States, international business  and the legal profession to help combat today’s conflicts.

 

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OECD / UN, Tax Risk Management, Transfer Pricing

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Corruption assessment: a component of Global (Tax) Risk Framework

The Eight Millennium Development Goals (MDGs) ...

The Eight Millennium Development Goals (MDGs) of UN. Target date: 2015 http://www.un.org/millenniumgoals/ (Photo credit: Wikipedia)

Today’s tax environment of increased transparency highlights the need to integrate an assessment of corruption into the Global Risk Assessment, including the Tax Risk Framework.  Proper governance includes monitoring perceptions, and actual cases, of corruption globally.  Brief summaries, with links, have been provided for Transparency International and the Global Portal on Anti-Corruption for Development, with additional references and recent articles, for reference.  The Corruption Perceptions Index by Transparency International is included in the first link.

Today the Transparency International movement includes more than 100 independent national chapters and partners around the world, which take action in support of our mission “to stop corruption and promote transparency, accountability and integrity at all levels and across all sectors of society”.

Transparency International calls on the United Nations to adopt a governance goal and governance targets for its post 2015 development priorities

http://www.transparency.org/news/pressrelease/transparency_international_calls_on_the_un_to_make_governance_a_priority_fo

The Global Portal on Anti-Corruption for Development is a one-stop-shop for information and knowledge specialized on anti-corruption for sustainable development. It aims to support the work of development/governance practitioners, anti-corruption bodies, researchers, civil society organizations and the donor community by facilitating easy access to information, cutting-edge knowledge and practical tools on anti-corruption at the global, regional and country level.

The Anti-Corruption for Development web portal is a unique and pioneering UN web platform that provides open access to information and knowledge related to the latest efforts to address corruption prevention against today’s development challenges: human rights, gender equality and empowerment, climate change and natural resource management, achievement of the Millennium Development Goals (MDGs) and Post-2015 Development Agenda, illicit financial flows and transitional contexts, among others.

http://www.anti-corruption.org/index.php/en/about

The Conference of Nigerian Political Parties (CNPP) has asked the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, to resign forthwith for misleading President Goodluck Jonathan on the damaging level of corruption in the country.

CNPP’s demand came as an aftermath of President Jonathan’s remarks in which he referred to a World Bank report from the minister placing corruption as third in the ranking of problems confronting the country.

http://allafrica.com/stories/201310010283.html

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Industry’s leading third party management software provider advises oil and gas companies to fundamentally re-think supply chain compliance.

With the realization that corruption is undermining development and the achievement of the Millennium Development Goals (MDGs), experts are lobbying the UN to adopt goals and targets on good governance and transparency in the post-2015 development agenda.

A high-level anti-corruption panel, co-chaired by UNDP, Transparency International and UNODC, gathered at the UN in New York in late September to highlight the impact of corruption on development and find ways to ensure that anti-corruption is part of the new global development agenda.

Is internal corruption slowing progress in developing countries?

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OECD / UN, Tax Risk Management

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BIAC Tax Principles/Best Practices/comments re: OECD TP risk assessment

Three new publications have been issued by the Business and Industry Advisory Committee (BIAC) to the OECD.  The publications encompass Best Practices and Tax Principles for Multinational Enterprises (MNEs), as well as comments on the OECD Draft Handbook on Transfer Pricing Risk Assessment.  These reports are worthy to note in an effort to better understand the continuing trend of transfer pricing scrutiny.

http://www.biac.org/policygrp/stmts-tax.htm

BIAC Statement of Tax Best Practices for Engaging with Tax Authorities in Developing Countries.  This statement is designed to enhance cooperation, trust and confidence between tax authorities and international business.  Key observations include:

  • Each of the 10 Best Practices directs that “Business should” or “Business may.”  Accordingly, it is written from the perspective of business directives.  There are no views or statements addressing Best Practice methodologies to be conducted by tax administrations.
  • The last Best Practice states: “Business should consider how best to explain more fully to the public their economic contribution and taxes paid in the jurisdictions in which they operate, where they determine that such explanation would be helpful in building trust in the tax system.”  This statement integrates the concepts of economic contribution and taxes paid with public trust.  Additionally, there are no references to arms-length principles or analysis of functions, assets, or risks.  It is important to note that taxes paid in different jurisdictions arise from very complex laws and regulations that are different in every jurisdiction, thus making it difficult for the public to draw insightful and relevant conclusions.

BIAC Statement of Tax Principles for International Business.  Noted statements include:

  • As a tax training principle, international business should only engage in tax planning that is aligned with commercial and economic activity and does not lead to an abusive result.  There is an explicit reference to economic activity, but a lack of terminology referencing arms-length principle or transfer pricing functions, assets or risks.
  • A Transparency and reporting principle states: “Where they determine such explanations would be helpful in building public trust in the tax system, they should consider how best to explain to the public their economic contribution and taxes paid in the jurisdictions in which they operate.”  This statement mirrors that from the Statement of Tax Best Practices noted above.

BIAC Comments on the OECD Draft Handbook on Transfer Pricing Risk Assessment, published on 30 April 2013.  This is a very informative document that outlines many of the issues being considered by the OECD, and provides a thoughtful reference for discussions going forward.  Some key  statements include:

  • The risk assessment should not exceed 6 months.
  • A “low risk” status can bring tangible benefits in terms of a reduced documentation requirement as well as efficiencies in the overall audit process.
  • A “deep dive” audit is not always required.
  • The first step in transfer pricing risk assessment should consider how the business generates profit, its approach to tax planning, its supply chain and the legal environment in which it operates.
  • “From a Transfer Pricing Risk Assessment perspective, we are very keen to see the cooperative compliance approach endorsed early in the Handbook, as a precursor to narrower assessment of transfer pricing risk.”
  • “We are concerned that the overall tone and focus of the Handbook could result in a negative and sceptical view of taxpayers.”
  • We would be particularly concerned if the use of such subjective language (i.e. large, small and material payments, high-tax and low-tax jurisdictions) led to tax administrations ignoring the arm’s-length principle.
  • “Indications of profitability, effective tax rate and comparative profits of related parties are concerning as the implication may be that the transactions are inappropriate.”
  • Any risk assessment report should be shared with the taxpayer.

The Appendix provides specific comments to the related paragraphs within the Handbook.  Two examples from Chapter 1, par. 9 are cited for reference:

  • Shifting income into jurisdictions where it will be lightly taxed or engaging in related party transactions designed to erode the local country tax base-shifting income is an unhelpful phrase.
  • We would welcome clarification that income should be taxed where the functions/assets/risks are performed.

The BIAC comments should be read to better understand the context of the current transfer pricing environment, and how proposals will affect MNEs and tax administrations in the future.

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Tax Risk Management, Transfer Pricing

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Action is not optional: Risk Management Study

This informative study by Accenture is based on a survey of 446 organizations, with the phrase “Action is not optional” as a key driver for its insights.

Click to access Accenture-Risk-Management-Research-For-An-Era-Of-Greater-Uncertainty-Report.pdf

The value of this study is initially revealed in the Contents, including the following topics:

  1. Current market pressures
  2. Becoming a high-performance risk organization
  3. Risk management talent
  4. Four things to do differently:
  • Treat risk management as a people game
  • Look ahead, as new risks are relentless
  • Manage compliance through a transformational lens
  • Focus on insight, not just data and analytics

Key excerpts from the study:

  • It is easy to say what the risks are, but if you do not have the instruments to see them or hear them coming, that is a problem.
  • 96% of risk management owners now report directly to the CEO.
  • “Risk Masters” are organizations with highly developed risk capabilities, likely to have a CRO, active Board involvement, adequate resources and budgets, integration of risk management in strategic decision-making, focus on strategic and emerging risk, talented staff and training programs and are ahead of the curve in using risk analytics.
  • Weighted priority on compliance requirements ahead of business value and newer hazards.
  • Risk management ownership is an executive board-level position, moving from the CFO to the CRO and CEO.
  • The goal is to infuse risk management comprehensively into business processes.
  • The least developed risk capability is risk organization and governance.
  • HIgh-performance risk management organizations have a people strategy of identifying, training and rewarding risk management talent.
  • Focusing on the “next war” may require a strategic plan for the risk management function, an integrated approach and direct involvement of senior management.

All Multinationals should have a prioritized objective for global risk management, and this study is instrumental in developing “Risk Masters” capabilities.

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Tax Risk Management

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OECD Exchange of tax information portal

As a follow up to the OECD G20 Report post on 8 September, information about the Exchange of Tax Information Portal is provided for further reference.  The respective jurisdiction can be selected, with agreements available via PDF files.  This site will be even more useful as countries complete the relevant Peer 1 and Peer 2 reviews.

The Exchange of Tax Information Portal is an initiative of the Global Forum on Transparency and Exchange of Information for Tax Purposes.  The Global Forum conducts peer reviews of its member jurisdictions’ ability to co-operate with other tax administrations in accordance with the internationally agreed standard. The standard provides for exchange of information on request where it is foreseeably relevant to the administration and enforcement of the domestic tax laws of the requesting jurisdiction. Effective exchange of information requires that jurisdictions ensure information is available, that it can be obtained by the tax authorities and that there are mechanisms in place allowing for the exchange of that information. The Global Forum’s peer review process examines both the legal and regulatory aspects of exchange (Phase 1 reviews) and the exchange of information in practice (Phase 2). The EOI Portal will track the development of these peer reviews, including changes that jurisdiction’s make in response to the Global Forum’s recommendations.  The Portal can be accessed from the following link:

http://www.eoi-tax.org/jurisdictions/AR

The Exchange of Tax Information Portal site should be used, and shared, for valuable reference on this important and current initiative.

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OECD / UN, Tax Risk Management

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OECD G20 Report & Best Practice Analogies

OECD’s report to the G20 leaders in St. Petersburg, Russia is attached for reference, consisting of a Progress Report to the G20 in Part I, and details of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan and offshore tax evasion efforts in Part II.  This posting will capture some highlights from the report, and pose analogies for Best Practices in alignment with the OECD’s initiatives.  The report may be accessed at:

Click to access SG-report-G20-Leaders-StPetersburg.pdf

The Introduction provides commentary on “legal tax avoidance,” renewed demands for greater transparency, calling for all taxpayers to pay their fair share, and completion of a global model for automatic exchange of information by 2014.

Initiatives of the Global Forum on Transparency and Exchange of Information (the Global Forum) have resulted in 119  jurisdictions committed to standards of transparency and exchange of information.  Best Practices includes communicating  results of the Global Forum to global and regional tax teams, and business leaders, to ensure that global consistency of information is being provided to tax authorities.  

The Global Forum promotes exchange of information via a monitoring and peer review process.  The process includes Phase 1 reviews, examining a jurisdiction’s legal framework for exchange of information, and Phase 2 reviews that examine information exchange in practice.  How well does the exchange of information process work for Multinational Enterprises (MNEs)?  Is this report, with a schedule of subsequent discussions on its impact, automatically sent to all tax team members, or is each individual personally responsible for accessing, reading and comprehending the report, including Phase 1 and Phase 2 reviews?

Peer reviews result in recommendations for improvement, with all jurisdictions required to provide follow-up reports describing actions taken. Re: global audits, are recommendations for improvement provided during, and after, the audit, with action steps documented?

The Global Forum has organized four training seminars in 2012, and five training seminars this year, in addition to implementation toolkits.  Appendix 4 of Part 1 provides a listing of members and observers, inherently resulting in potential impacts for these proposals beyond the OECD member countries.  How many training forums and business tools have been provided by MNEs in the last two years to review the ongoing trend of global tax proposals?

Part 2 lists the 15 activities of the BEPS Action Plan to be addressed by all relevant stakeholders.  For analogy, has the MNE also listed those same activities, addressing potential impacts, risk quantifications and expected actions for each of the proposals, including a relevant timeline and accountability?  Are all international tax team members and business leaders aware of the BEPS Action Plan?

Automatic exchange of information is becoming the norm, versus the exception, for tax authorities around the world.  How are tax changes, audit queries, changes in tax laws, etc., communicated within the MNE enterprise quickly and efficiently?  Is  a tax newsletter communicated to the global business, addressing areas of focus and learning?

Annex 2 of the Progress Report outlines a model of multilateral automatic exchange of information designed to implement a step change in transparency.    This section is useful in addressing future legislative changes, draft model competent authority agreements, legal / confidentiality concerns, and legal bases for the exchange of information.  MNEs should track public comments and future changes of OECD member countries and observers to address these initiatives.

The highlights of the OECD G20 Report, and suggested comments for Best Practices, are meant to promote creative thought and reflection to effectively plan for the rapid evolution of change in the international tax arena.

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OECD Multilateral Convention: Automatic information sharing among G20 countries

With China’s commitment on 27 August 2013, all G20 countries have signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Convention), resulting in automatic exchange of information as the new global standard.

Tax authorities are cooperating multilaterally and automatically, as the Convention provides for spontaneous exchange of information, simultaneous tax examinations and tax assistance.  The accompanying press release, including a list of the 56 signatories, is available at:

http://www.oecd.org/tax/china-joins-international-efforts-to-end-tax-evasion.htm

What are the implications on Best Practices for these continuing developments?  Ideas for consideration include the following:

  • Providing taxpayer information to one authority should be viewed as being provided to many countries worldwide, thus maintaining consistency is essential.  A formal methodology will ensure Best Practices are being followed.
  • Tax assistance, simultaneous examinations and joint audits should be envisioned for reviewing the global Tax Risk Framework.
  • Best Practices for implementation of Mutual Agreement Procedure (MAP) are a topic of frequent discussion by tax authorities worldwide; thus Best Practices for Multinationals should also be focused on risk identification, measurement and application of MAP.
  • Related posts for reference:
  1. 23 July, OECD exchange of information: Multilateral Convention review
  2. 27 June, OECD FTA MAP forum to develop Best Practices
  3. 25 June, OECD report to the G20: Status, training, effectiveness
  4. 20 June, OECD Global Forum on Transparency and Exchange of Information: Activities
  5. 18 June, OECD: Tax Transparency report.
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Audits, OECD / UN, Tax Risk Management, Transfer Pricing

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PE Best Practices Risk Review: BEPS Action Plan, OECD & UN Model Conventions

A Permanent Establishment (PE) risk review is an integral component of a global Tax Risk Framework, increasing in importance with issuance of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan.  The PE risk review should be monitored on a recurring basis against the backdrop of current and future developments.  The OECD and UN Model Conventions, with related Commentaries, provide insight into the development and current state of international PE guidelines.  The Conventions provide a useful framework to document specific PE criteria, and exceptions thereto, for risk analysis.

Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan states that the definition of PE must be updated to prevent abuses.  Action 7 (Prevent the artificial avoidance of PE status) provides additional PE initiatives.  Actions 6 and 7 are designed to implemented by September 2014 and September 2015, respectively.  It will be paramount to note any changes in the “preparatory or auxiliary” exception.  A link to the BEPS Action Plan is hereby provided for reference:  http://www.oecd.org/ctp/BEPSActionPlan.pdf

Article 5 of the OECD Model Convention provides an outline for PE determination, including a “fixed place of business” standard, building site or installation project criteria, the “preparatory or auxiliary character” exception, dependent agent rules and further exceptions for activities of an independent agent and related entities.  The OECD Model Convention can be accessed at: http://www.oecd.org/tax/treaties/oecdmtcavailableproducts.htm

The OECD Commentaries are required reading to fully comprehend the history, and intended meaning, of Article 5.  Paragraph 2 of the Commentary provides an outline for determination of a “fixed place of business,” consisting of (i) the existence of a “place of business,” (ii) this place of business must be “fixed,” and (iii) the carrying on of the business through this fixed place of business.  Paragraph 24 of the Commentary states that , for application of the “fixed place of business” rule, “the decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole.”  Paragraph 33 further provides that “the authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise.”

The attached reference provides access to the UN Model Convention, Letter from India (13 Aug 2012), revised commentary on existing Article 5 and definition of PE for comprehensive understanding of the current PE Article.  The UN Model Convention contains an Introduction, Part One (including the Articles), and Part Two with Commentaries.  Paragraph 20 of the Commentaries states that the Commentaries on the Articles are regarded as part of the UN Model Convention, along with the Articles themselves.  Most importantly, Part Two cites differences of the UN and OECD Model Conventions, such as the UN inclusion of a services standard, exceeding 183 days in any 12-month period, that is not within the OECD guidelines.   http://www.un.org/esa/ffd/tax/unmodel.htm

Best Practice ideas for outlining PE risk include:

  • Documenting potential significant PE risks by legal entity, with specific reference to the PE attribute that attracts such risk, such as a fixed place of business or dependent agent.
  • Outlining availability of the preparatory or auxiliary character exception for potential risks.
  • Inclusion of objective and subjective evidence that provides defense for a potential PE determination, including wording from the applicable Convention and Commentaries.
  • Tools available to reduce double taxation upon determination of a PE, such as the Mutual Agreement Procedure (MAP).

The above Best Practices should be combined with Best Practice ideas in former posts:

  • 14 April PE Risks: Best Practices for Awareness & Planning
  • 14 July: PwC PE survey: Trends & Challenges

PE determination is increasing in importance in today’s changing tax world, thus a detailed risk matrix is essential to determine current potential risk areas, as well as provide valuable information to assess proposed changes by the OECD and/or UN.

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OECD / UN, PE, Tax Risk Management, Transfer Pricing

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China APA Report 2012: More APAs

http://www.chinatax.gov.cn/n8136506/n8136608/n9947993/n9948014/n12360820.files/n12360827.pdf?goback=%2Enmp_*1_*1_*1_*1_*1_*1_*1_*1_*1_*1#%21

THe 2012 Annual Report outlines China’s Advance Pricing Agreement (APA) process, in addition to statistics for 2005 – 2012.  The agenda of the report includes:

  • APA Program definition and advantages
  • Legislation and Development of APA program
  • APA Procedures
  • Taxpayers’ Rights
  • Statistics and Contacts
  • Appendices, including formal meetings and applications

A Best Practices methodology addressing APA’s should be outlined in the global Tax Risk Framework for every multinational corporation.  This methodology will summarize some of the following points:

  • A description of the decision matrix for an APA and its implementation
  • Preference for unilateral or bilateral APAs
  • Implementation of global/regional/country proactive and/or reactive risk management tools
  • Outline of significant jurisdictions, timelines, work plan, and accountability for implementation
  • Integral coordination with tax counsel, and other functional business units
  • Review plan for an APA methodology in today’s rapidly changing tax environment (evidenced recently by the change in administrative leadership for the India APA program)
  • Review of applicable gaps that may exist to retrieve information readily for proactive, or reactive, APAs

Tax jurisdictions, and MNEs, are increasing their focus on APAs amidst a trend of growing uncertainty and complexity in international transfer pricing principles.  The China APA Report provides good preparation for a better understanding of the complex, and lengthy, preparation needed by all parties to obtain an APA.

Category:

Tax Risk Management, Transfer Pricing

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